Trade flows backed by letters of credit (L/Cs) were more resilient than flows backed by other instruments at the height of the Covid-19 pandemic in 2020 according to a paper written by researchers at the London-based Centre for Economic Policy Research (CEPR), an independent, non-profit organisation that takes no institutional policy positions.

The research introduces a new index capturing product-level L/C-intensity and uses it to compare the performance of trade in products typically relying on L/Cs relative to other products at times during the Covid-19 crisis.

Product-level analysis

The paper provides a graph showing the evolution of monthly US exports from January 2019 to December 2020. The collapse of US exports during the Covid-19 pandemic in April and May 2020 is clearly visible.

But the graph shows that the dip in US exports of products that traditionally rely more on L/Cs is milder and the rebound faster.

US and European data

The researchers also looked at monthly data on US and 15 European countries' exports, disaggregated by destination country and product codes, for the period April 2017 to December 2020.

This confirmed that exports of products that traditionally rely more on L/Cs were more resilient relative to other products during the pandemic.

Reliable Turkish data

The researchers then looked at Turkey, which uniquely collects and verifies information on actual financing terms used in each trade transaction. Therefore, as a validation exercise, they conducted additional analysis based just on this apparently very reliable Turkish data.

Their findings using the Turkish data are consistent with those for the US and European exports, again confirming that exports of products that traditionally rely more on L/Cs were more resilient relative to other products during the pandemic.

Trade insurance matters: Evidence from the Covid-19 pandemic can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.